A Guide to How the Fed Funds Rate Affects You

The Federal Reserve, the central bank of the United States, adjusts the Federal Funds Rate with the goal of keeping the economy growing at a steady pace. As the Federal Funds Rate is adjusted up or down, mortgage interest rates tend to follow closely, which can significantly impact your borrowing costs.

This guide explores what the Federal Funds Rate is and why it matters to homeowners.

What Is the Federal Funds Rate?

The Federal Funds Rate, sometimes called the Fed's benchmark interest rate, sets a target interest rate range that banks can use to borrow from each other overnight. The Federal Reserve uses the Fed funds rate as a key monetary policy tool to promote economic stability.

The Federal Reserve sets a target interest rate range. For example, the current target interest rate range is 3.50% to 3.75%, as of March 30, 2026, and the actual rate falls somewhere in between 3.60% and 3.66% as of writing.

When the Fed funds rate is raised or lowered, it affects interest rates on most loans, including mortgages.

Federal Funds Rate vs. Other Interest Rate Benchmarks

Importantly, the Federal Funds Rate isn't the same thing as a prime rate or discount rate , which are other benchmarks used to guide interest rate decisions for lenders. Here's a look at these other interest rate options:

• Prime rate: The prime rate serves as a benchmark for lenders when determining interest rates on consumer loans. Typically, the prime rate is higher than the federal funds rate.
• Discount rate: Unlike the Fed funds rate, which reflects the interest rate banks charge each other for overnight loans, the federal discount rate is the interest rate the Federal Reserve charges banks for short-term loans.

How the Federal Funds Rate Works

The Federal Open Market Committee (FOMC), which is composed of the Board of Governors and Federal Reserve Bank presidents, meets eight times each year to assess economic activity. At each meeting, the FOMC may adjust the federal funds rat e or engage in an Overnight Reverse Repurchase Agreement (ON RRP) to steady the economy.

Once the FOMC announces a target range for the federal funds rate, this benchmark number affects interest rates on most consumer loans. Everything from credit card interest rates to mortgage rates is impacted.

If the FOMC raises the Federal Funds Rate, you can expect borrowing to get more expensive. Conversely, if the Federal Funds Rate drops, you might enjoy lower interest rates on loan products, which could make borrowing more affordable.

How the Federal Reserve Decides the Federal Funds Rate

The Federal Reserve takes a close look at the economy before setting the Federal Funds Rate. A few key details the FOMC considers are inflation, employment rates, Gross Domestic Product (GDP) growth, global economic conditions, and current fiscal policy.

For example, in recent years, the Federal Reserve chose to increase interest rates in an attempt to tame inflation but lowered the Federal Funds Rate after inflation fell into a more acceptable range.

How the Fed Funds Rate Impacts Mortgage Rates

While the Fed Funds Rate isn't the same as mortgage rates, it affects the overall interest rate environment. Changes to the Fed Funds Rate ripple through the economy to influence rates on most consumer loans, including mortgages. However, different types of home loans are impacted differently by changes to the Federal Funds Rate. Here's a closer look at what to expect for different mortgage types:

• Fixed-Rate Mortgage: Fixed-rate mortgages are typically affected by bond markets and longer-term interest rates. But the Fed rate can still put upward or downward pressure on these rates.
• Adjustable-Rate Mortgage: ARMs tend to be more sensitive to changes in the Federal Funds Rate, with larger swings up and down.
• Home Equity Loans: HELs usually have fixed interest rates that are tied to the prime rate. The rates attached to new HELs can change quickly when the Federal Funds Rate is adjusted.
• Home Equity Lines of Credit: HELOCs tend to have variable interest rates attached to the prime rate, which means these rates can change quickly and significantly impact the budget of borrowers.

When Should You Refinance Based on Fed Announcements?

When the Fed makes announcements about changing Federal Funds Rates, it's natural to wonder how that might impact your own wallet. For homebuyers, a falling federal funds rate could mean lower mortgage rates are on the horizon.

But for homeowners wondering whether a falling Fed Funds Rate makes it a good time to refinance, the answer requires a closer look at your situation. Start by confirming that your mortgage rate is higher than the current mortgage rates. If it is, calculate how much you might stand to save with a refinance and make sure it's worth the upfront costs.

Final Thoughts: What the Fed Funds Rate Means for You

When you see headlines about the Fed Funds Rate, it could mean it's time to reevaluate your current mortgage. After all, a falling Federal Funds Rate could help you tap into a lower mortgage rate that makes a difference to your financial situation.

If you want to take advantage of a changing Federal Funds Rate, consider finding out what your refinance rate could be today.